What New Student Loan Repayment Options Mean

According to a recent report published by the Federal Reserve of New York, student loan debt has gained a few dubious distinctions. First, student loan debt has topped $1 trillion. Second, the 12% delinquency rate is higher than the delinquency rate for credit cards and mortgage payments. If that isn't bad enough, the average student who took out student loans will graduate with $26,600 worth of loan debt, which is 5% higher than the class just one year prior.

Students, parents and many lawmakers are all saying the same thing: Something has gone terribly wrong when student loan debt is rising. However, the average earnings for 25 to 34 year holds with a bachelor's degree has fallen 1.6% annually from 2000 to 2010.

Moreover, that is just for the students who find jobs. A 2012 report found that 53% of recent college graduates, or 1.5 million people under the age of 25 with bachelor's degrees, are either unemployed or underemployed. That is the highest reading in 11 years.

Although student loans are generally not discharged in bankruptcy proceedings (important to know for anyone considering the student debt bankruptcy option), that does not change what could be an increasing burden on the economy. Bankrupt loan holders may not be able to get rid of the debt, but since many are not working few have the ability to pay back the loans.

Others believe that with the burden of student loan debt so high, the next generation of homebuyers, investors and parents will put off these economically stimulating events in order to service their debt load.

Pay-As-You-EarnThe Pay-As-You-Earn (PAYE) Repayment Plan is part of Washington's answer to what some call the student loan crisis. The program allows students to cap their monthly payments to 10% of their discretionary income. Additionally, some loans are forgiven after 20 years.

However, there were two problems with this program. First, it wasn't set to phase in until 2014, and second, the program only applied to public loans. Private loans are unaffected. Nothing has been done about private loans, but the Obama administration took action to help the estimated 1.6 million borrowers that could take advantage of the program. The program was put into effect on Dec. 21, 2012 of this year.

To qualify, students must have taken out the loans after Oct. 1, 2007 and received at least one disbursement after October of last year, according to the Associated Press. Students also have to qualify for partial financial hardship based on the part of their income that repayments will cost.

Just like any loan, it is nice to get some more breathing room to make payments, but that does not mean that the borrower is paying less in the end. In fact, he or she may pay more as more interest is paid on a higher principal.

Critics have also argued that marketing a program that lowers payments may give students a false sense of what they can afford to pay each month. By failing to look at the total amount they will pay over time, they may feel like they can take out more loans while enrolled.

Another PlanAnother plan, sponsored by Tom Petri (R-Wis) aims to set up a student loan debt collection plan that will help keep student loans in check and is is similar to the system used in the U.K. and Australia. Much like child support payments or even tax withholdings, student loan debt would be automatically deducted from the borrower's paycheck based on income.

This plan would not only reduce the 12% delinquency rate and repay taxpayers who have funded much of the outstanding debt, but it would also provide borrowers with lower payments, especially when they are just out of college and wages are low.

The Bottom LineThe combination of rising student loan debt and high unemployment has left debt loads that are a strain to new graduates. This is not just an individual problem, but also a problem for the economy. A completely new generation of career professionals is not pumping money into the economy. Instead, that money is now going to loan payments. Experts hope that programs like Pay-As-You-Go will help solve this problem.